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Entrepreneurship and small business: Feasibility Analysis

Entrepreneurship and small business:Feasibility AnalysisMuhammad Shafiqforshaf@gmail.comhttp://www.slideshare.net/forshafBook references: Entrepreneurship by Bruce R. BarringerEntrepreneurship by Hisrich

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What Is Feasibility Analysis?Feasibility AnalysisFeasibility analysis is the process of determining whether a business idea is viable. It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing.Feasibility analysis takes the guesswork (to a certain degree) out of a business launch, and provides an entrepreneur with a more secure notion that a business idea is feasible or viable.

Timing of Feasibility AnalysisThe proper time to conduct a feasibility analysis is early in thinking through the prospects for a new business.The thought is to screen ideas before a lot of resources are spent on themComponents of a Properly Conducted Feasibility AnalysisA properly conducted feasibility analysis includes four separate components.When To Conduct a Feasibility Analysis

Outline for a Comprehensive Feasibility Analysis

Feasibility Analysis

Role of feasibility analysis in developing business ideas.

Product/Service Desirability

Does it make sense? Is it reasonable? Is it something consumers will get excited about?Does it take advantage of an environmental trend, solve a problem, or take advantage of a gap in the marketplace? Is this a good time to introduce the product or service to the market? Are there any fatal flaws in the product or services basic design or concept? First, ask the following questions to determine the basic appeal of the product or service.

1. Product/Service Feasibility AnalysisProduct/Service Feasibility AnalysisIs an assessment of the overall appeal of the product or service being proposed.The idea is that before a prospective firm rushes a product or service into development, it should be confident that the product or service is what its prospective customers want.The two components of a product/service feasibility analysis are:

Product/Service DesirabilityProduct/Service Demand

Second, Administer a Concept TestA concept statement should be developed.A concept statement is a one page description of a business, that is distributed to people who are asked to provide feedback on the potential of the business idea.The feedback will hopefully provide the entrepreneurA sense of the viability or the product or service idea.Suggestions for how the idea can be strengthened or tweaked before proceeding further.

Product/Service Desirability

Developing a Business Concept In developing a business concept, consider the features and benefits your proposed product or service will offer.

features distinctive aspects, qualities, or characteristics of a product or service benefits things that promote or enhance the value of a product or a service to the customer

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When developing a business concept an entrepreneur must ask the following questions:

What is the product or service being offered Who is the customer? What is the benefit that is being provided? How will the benefit be delivered to the customer?

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Preparing a Concept StatementInformation to IncludeA description of the product or service being offered.The intended target market.The benefits of the product or service.A description of how the product will be positioned relative to similar ones in the market.A description of how the product or service will be sold and distributed.Information about the founder or founders of the firm.

New Venture Fitness Drinks Concept Statement

Their are three steps to assessing product/service demand.Step 1: Administer a Buying Intentions Survey- an instrument that is used to gauge customer interest in a product or service.Step 2: Conduct library, Internet, and Gumshoe research Step 3: Usability Testing Usability tests are sometimes called user tests, beta tests, or field trials, depending on the circumstances involved.PrototypeVirtual PrototypeStandard Test MarketControlled Test Market

Product/Service Demand

One of the most effective things an entrepreneur can do to conduct a thorough product/service feasibility analysis is to hit the streets and talk to potential customers.

Product/Service Feasibility Analysis in Action

Role of feasibility analysis in the development of successful business ideas at Activision (an electronic games company)

The Activision Green Light Process

2. Industry/Target Market Feasibility Analysis

It is an assessment of the overall appeal of the industry and the target market for the proposed business. An industry is a group of firms producing a similar product or service. A firms target market is the limited portion of the industry it plans to go after.For industry/market feasibility analysis, there are three primary issues that a proposed business should consider:Industry attractiveness, market timeliness, and the identification of a niche market.

Industries vary in terms of their overall attractiveness.In general, the most attractive industries have the characteristics depicted on the next slide.Particularly importantthe degree to which environmental and business trends are moving in favor rather than against the industry .

Industry Attractiveness

Industry Attractiveness

In addition to evaluating an industrys growth potential, a new venture will want to know more about the industry it plans to enter.This can be accomplished through both primary and secondary research, as explained in the next slide.

Role of Primary and Secondary Research in Investigating Industry Attractiveness

Type of ResearchHow It Is ConductedPrimary researchSecondary researchThis is research that is original and is collected by the entrepreneur. In assessing the attractiveness of a new market, this typically involves an entrepreneur talking to potential customers and key industry participants.This is research that probes data that are already collected. Examples of where this data might come from are: industry-related publications, government statistics, competitors Web sites, and industry reports from research firms like Forrester Research.

Market Timeliness Considerations

Nature of Product or Service IntroductionImprovement on something already available in the marketplaceBreakthrough new product or service, which should establish a new market segmentMajor Considerations Is the window of opportunity open or closed? Is now a good time for a new market entrant (i.e. are customers buying, are industry incumbents making money?) Should we try to capture a first-mover advantage or not?

First mover advantage orSecond-mover advantage?22

Entry Strategy For New Entry ExploitationFirst Mover- Launching new to the world product or service or at least new to the market. (Pioneer advantage)First mover faces less competitive rivalryFirst movers can secure important channelsFirst movers are better positioned to satisfy customersAbove-average returnsCustomer loyaltyAn early hold on market share

Disadvantages of Being FirstDemand Uncertainty: Considerable difficulty in accurately estimating the potential size of the market, how fast it will grow, and the key dimensions along which it will grow.Technological Uncertainty: Considerable difficulty in accurately assessing whether the technology will perform and alternate technologies will emerge and leapfrog (game) over current technologies.Uncertainty of Customers: Customers may have considerable difficulty in accurately assessing whether the new product or service provides value for them.

Second Mover Responds to first mover, typically through imitationIs more cautious than first moversTends to study customer reactions to product innovationsTends to learn from the mistakes of first movers, reducing its risksTakes advantage of time to develop processes and technologies that are more efficient than first movers, reducing its costsReduce the entrepreneurs costs associated with R&D.Reduce customer uncertainty over the firm.

25Characteristics of second movers compared to first movers.

Late Mover Responds to market opportunities only after considerable time has elapsed since first and second movers have taken actionHas substantially reduced risks and returns

26Characteristics of late movers compared to first and second movers.

New Product Adopters GroupsInnovators- Venturesome, they try new ideas at some risksEarly adopters- they adopt new ideas early but carefullyEarly majority- Adopt new ideas before average personLate majority- Adopt new idea after a majority of people tried it.Laggards- people suspicious to changes and adopt new product when it becomes some thing of a tradition itself (essential part of life)

Identification of a Niche MarketNiches do not 'exist' but are 'created' by identifying needs, wants, and requirements that are being addressed poorly or not at all by other firms.For a new firm, selling to a niche market makes sense for at least two reasons. It allows a firm to establish itself within an industry without competing against major competitors head on.A niche strategy allows a firm to focus on serving a specialized market very well instead of trying to be everything to everybody in a broad market, which is nearly impossible for a new entrant. Target Market AttractivenessThe challenge in identifying an attractive target market is to find a market thats large enough for the proposed business but is yet small enough to avoid attracting larger competitors.

Identification of a Niche Market

3. Organizational Feasibility AnalysisIt is s concerned with determining whether the business itself has sufficient skills and resources to bring a particular product or service idea to market successfully.

Focuses on non-financial resources.

There are two primary issues to consider in this area:Management prowess.Resource sufficiency.

Management ProwessA firm should candidly evaluate the prowess, or ability, of its management team to satisfy itself that management has the requisite passion and expertise to launch the venture.Two of the most important factors in this area are:The passion that the solo entrepreneur or the founding team has for the business idea.The extent to which sole entrepreneur or the founding team understands the markets in which the firm will participate. Solo entrepreneurs or founding teams with established social and professional networks also have an advantageManagement Prowess

skill or expertise in a particular activity or field.30

Management Competence

An indication of passion is the willingness of a new venture team to complete comprehensive feasibility analysis.

An Internet start-up named Garden.com, which was launched in 1995 to sell gardening supplies on the Internet. None of Garden.coms three founders had any experience in garden retailing, nor were they knowledgeable gardeners. The firm failed after losing many millions of dollars of its investors money.32

Resource Sufficiency

This topic pertains to an assessment of whether an entrepreneur has sufficient resources to launch the proposed venture.The focus here should be on nonfinancial resources in that financial feasibility is considered separately.To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that will be needed to move the business idea forward successfully.If critical resources are not available in certain areas, it may be impractical to proceed with the business idea.

Resource Sufficiency

Examples of nonfinancial resources that may be critical to the successful launch of a new business

Availability of affordable office or lab space. Likelihood of local and state government support of the business. Quality of the labor pool available. Proximity to key suppliers and customers. Willingness of high quality employees to join the firm. Likelihood of establishing favorable strategic partnerships. Proximity to similar firms for the purpose of sharing knowledge. Possibility of obtaining intellectual property protection in key areas.

4. Financial Feasibility AnalysisFor feasibility analysis, a quick financial assessment is usually sufficient. The most important issues to consider at this stage are:Total start-up cash needed.Financial performance of similar businesses.Overall attractiveness of the proposed venture.

The first issue refers to the total cash needed to prepare the business to make its first sale.An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. The point of this exercise is to determine if the proposed venture is realistic given the total start-up cash needed.When projecting start-up expenses, it is better to overestimate rather than underestimate the costs involved.Murphys Law is prevalent in the start-up worldthings will go wrong. It is a rare start-up that doesnt have some setbacks in getting up and running.

Total Start-Up Cash Needed

Estimate the proposed start-ups financial performance by comparing it to similar, already established businesses.There are several ways to doing this, all of which involve a little ethical detective work.First, there are many reports available, some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of individual firms.Second, simple observational research may be needed. For example, the owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends.Financial Performance of Similar Businesses

Overall Financial Attractiveness of the Proposed InvestmentA number of other financial factors are associated with promising business startups. In the feasibility analysis stage, the extent to which a business opportunity is positive relative to each factor is based on an estimate rather than actual performance.The table on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea.Overall Financial Attractiveness of the Proposed Venture

Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche. High percentage of recurring revenuemeaning that once a firm wins a client, the client will provide recurring sources of revenue. Ability to forecast income and expenses with a reasonable degree of certainty. Internally generated funds to finance and sustain growth. Availability of an exit opportunity for investors to convert equity to cash.Financial Factors Associated With Promising Business Opportunities

Shown in Appendix 4, is a template for completing a feasibility analysis.http://wps.pearsoned...